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Wall Street Legend Farrell’s 10 Rules for Investing Key in This Bull Market

Wall Street Legend Farrell’s 10 Rules for Investing Key in This Bull Market

Bob Farrell has been a lasting icon on Wall Street for his ability to foresee upcoming stock market changes, and his lauded 10 rules for investing still hold up today as the bull market rages on.

Farrell, 88, was the chief analyst and senior investment adviser for 45 years at Merrill Lynch, where he became well-known for his ability to recognize patterns in the stock market. After Leaving Merrill Lynch in 2002 he formed Farrell Advisory Inc., and his 10 rules for investing are still prevalent among Wall Street traders.

“Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names,” Rosenberg Research said in a note to clients Monday, referencing Farrell’s seventh rule.

While the indexes continue to reach new record highs seemingly every other day, the firm’s chief economist and strategist, David Rosenberg, doesn’t like how headlines are ignoring how narrow markets are right now. Five stocks (Facebook, Amazon, Google parent Alphabet, Microsoft and Amazon) comprise almost 20% of the S&P 500’s current market cap, which is the highest concentration since the dot-com bubble of 2000, according to Rosenberg.

“Once it becomes apparent that these growth companies can’t continue to grow by the multiples of nominal GDP that are currently priced in, the realization will send these stocks into a period of downward momentum that could be accentuated by a herd effect heading to the exits in these heavily populated indexed funds,” he said in his note.

And the bubble is going to pop, according to Farrell’s rule No. 2, which states: “Excesses in one direction will lead to an opposite excess in the other direction.”

Rosenberg recently called Wall Street’s current run a “bull market in financial engineering” that’s going to send gold to $3,000.

Here are Farrell’s 10 rules for investing you can apply to your trading strategy while the bull market continues to surge upward:

Bob Farrell’s 10 Rules for Investing

  1. Markets tend to return to the mean over time.
  2. Excesses in one direction will lead to an opposite excess in the other direction.
  3. There are no new eras — excesses are never permanent.
  4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
  5. The public buys the most at the top and the least at the bottom.
  6. Fear and greed are stronger than long-term resolve.
  7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
  8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend.
  9. When all the experts and forecasts agree — something else is going to happen.
  10. Bull markets are more fun than bear markets.